How far up the housing equity ladder should you expect to be at your age?

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Becky O'Connor

Personal Finance Specialist

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New analysis of official mortgage figures has revealed how old UK mortgage borrowers are when they take out home loans at different loan-to-value limits.

The analysis of FCA data on new mortgage sales by Royal London, the mutual insurer, reveals:

-          Borrowers aged 36-40 and above typically put down a deposit of at least 25% - a ‘tipping point’ for access to lower mortgage rates;  below this age, borrowers are usually borrowing more than three quarters of the value of their property;

-          The age for reaching this tipping point has risen. In 2007, the majority of 31-35 year-olds were also able to find a 25% deposit, but by 2013, most of that age group were borrowing more than 75%; this reflects the rising average age of a first time buyer, up from 28 in 2007 to age 34 now;

-          In the decade since the financial crisis there has been an increase back up to 2008 levels in the number of borrowers in all age brackets with relatively small deposits in the range 5%-25%;

-          Loans above 95 per cent have however remained a negligible part of the market since 2008;

-          The age at which homebuyers are borrowing less than 30% of the value of their property has also risen in recent years. Back in 2007, borrowers had reached this point when they were 51 – 55, but in 2018, it was not until they were aged 56-60 that homebuyers were stumping up at least 70 per cent of the equity; 

-          The data also suggests that the majority of homeowners aged 51 or over who take out new loans are taking out a mortgage for less than half the value of their home;

-          In 2018, 46 per cent of borrowers aged 18 to 25 borrowed more than 85 per cent of the value of their home;

The most common LTV brackets for different age groups in 2018 compared with before the financial crisis

 

Source: FCA New PSD mortgage sales

Mortgage rates fall for borrowers as their loan-to-value decreases and they own more of the equity in their properties, with those borrowing less than 75 per cent of the value of their home typically enjoying the lowest rates.

Progress up the housing equity ladder depends on three main factors:

  1. House price growth – when house price growth is faster, borrowers move up the housing equity ladder more quickly;
  2. Repayment plans – those with shorter mortgage terms and those who make overpayments that reduce the capital balance will see the proportion of their borrowings in relation to their property value decrease more quickly;
  3. Whether borrowers take advantage of having more equity in their properties to remortgage and borrow more.

More younger borrowers in higher LTV brackets…

The proportion of borrowers taking out loans between 90 and 95 per cent has risen to levels not seen since 2007/2008 for all homeowners under the age of 50, according to the data, with the biggest rise in this LTV bracket among those under 35.

However new loans issued at the very highest loan-to-value bracket of 95 per cent or more of a property’s value remain well below pre-crisis levels, at less than 1 per cent of borrowers in all age brackets, suggesting that this remains a no-go zone for the majority of lenders and borrowers.

… But LTVs are rising among older generations, too

It’s not until a homeowner hits the 51 to 55 age bracket that they can expect to be able to remortgage or apply for a new loan for a LTV of less than 50 per cent, with just over half of borrowers in this age bracket borrowing less than 50 per cent in 2018.

However, the proportion of borrowers above retirement age (66 plus) borrowing 30 to 50 per cent of their property’s value has been steadily rising since the financial crisis, with 27 per cent of 66-70 year olds now taking out new mortgages with an LTV between 30 and 50 per cent, up from 21 per cent in 2009.

Among 71 to 75 year old new mortgage applicants, 26 per cent are now borrowing between 30 and 50 per cent of their home’s value, up from 23 per cent 10 years ago.

Becky O’Connor, personal finance specialist at Royal London, said: “Moving up the housing equity ladder helps you to access better interest rates and makes homeownership more affordable. But as the age of first time buyers has risen, families are having to wait until later in life before they make a serious dent in their mortgage and can benefit from lower rates.

“In the last ten years, the lie of the land has changed significantly for borrowers as a result of the financial crisis, changes to the way mortgage lenders assess affordability and rising house prices.

“For those who already own their home, house price inflation is a windfall, giving them a bigger deposit when they remortgage and enabling them to access lower mortgage rates. 

But those still waiting to buy a home when house prices rise must stretch to a higher loan-to-value initially and then face the likelihood of being stuck paying higher rates on the higher LTV for longer if house price growth remains relatively flat.

“Now that house price growth looks to be levelling out, it could potentially take these younger, more stretched borrowers longer to get their loan-to-value level down than was the case for homeowners who got on the ladder some years ago and benefited from big house price gains.

“However even within older age groups, the data shows the LTV level for new home loans is rising.”

According to Moneysavingexpert.com, the best-buy two-year fixed rate deal currently available to those with only a 10% deposit is 1.78 per cent, compared with a rate of 1.49 per cent for a borrower borrowing less than 75 per cent of their property’s value.

On a home worth the UK average of £228,147, the difference in monthly mortgage repayments on a repayment basis over a 25-year term between someone borrowing £171,110 (75% of the property value) at the best buy rate for a 90 per cent mortgage (1.78 per cent) and the best buy rate of 1.49 per cent at 75 per cent is £24 a month.

Notes to editors:

Data taken from FCA Mortgages Product Sales Data 15 March 2019

PSD only captures new sales (including remortgages); transfers, top-ups, alterations (such as mortgage switches with the same lender), increments and renewals are generally not included.

The FCA publishes other sources of mortgage data, such as statistics from the Mortgage Lending and Administration Return (MLAR) which is not directly comparable to mortgage PSD due to differences in data coverage. For example, further mortgage advances are included in the MLAR but not in the PSD. Users of the PSD are therefore advised to bear this in mind when comparing mortgage PSD to other data.

All home finance providers are required to submit the mortgage PSD.

188 firms provided mortgage PSD to the FCA in 17/18.

For further information please contact:

Becky O’Connor, Personal Finance Specialist

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £114 billion, 8.8 million policies in force and 3,893 employees. Figures quoted are as at 30 December 2018.